Klein v. Boyd

Brief Fact Summary.

Four investors (Plaintiff) in a failed limited partnership sued the law firm (Defendant) that represented the partnership for federal securities law violations, common law fraud, and Racketeer Influenced and Corrupt Organizations Act (RICO) violations

Synopsis of Rule of Law.

A duty to disclose may arise from either a fiduciary relationship or from affirmative misrepresentations omitting a material fact, and attorneys who participate significantly in the making of their client’s misrepresentations should be held accountable as primary violators under § 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5

Facts.

Coleman, who had a long history of securities fraud, joined with a new partner to purchase a securities broker business.  An attorney, Drinker (Defendant), completed the partnership agreement, a subscription agreement, and a disclosure letter.  He also prepared a “November Disclosure Package,” which did not include any information about Coleman’s past fraudulent conduct.  When financial difficulties came upon the limited partnership, some investors (Plaintiff) sued Drinker (Defendant) and the partnership (Defendant), for violation of federal securities law, common law fraud, and RICO violations.  The district court granted Drinker’s (Defendant) motion for summary judgment on all counts.  The investors (Plaintiff) appealed

Issue.

Does an attorney have a duty to disclose if he participates significantly in the making of his client’s affirmative misrepresentations omitting material facts?

Held.

(Mansmann, J.)  Yes.  A duty to disclose may arise from either a fiduciary relationship or from affirmative misrepresentations omitting a material fact, and attorneys who participate significantly in the making of their client’s misrepresentations should be held accountable as primary violators under § 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5.  Once a law firm has chosen to speak, it may not omit facts material to its nonconfidential opinions.  When a lawyer prepares a document with knowledge that the document will be distributed to investors, the lawyer has chosen to speak to the investors, even though the document may not be attributed to the lawyer on its face.  A trier of fact might reasonably infer that Drinker (Defendant) intentionally withheld material information from the disclosure statements and that he acted with scienter.  The district court’s judgment is reversed as far as granting the law firm’s motion for summary judgment on the federal securities claim and on the investors’ common law fraud claim.  Since the law firm did not participate in the operation of the alleged enterprise, it cannot be liable under RICO laws.  Affirmed in part, reversed in part.

Discussion.

The court in this case discussed § 10(b), which forbids manipulative or deceptive acts in connection with the purchase or sale of securities.  Rule 10b-5 was promulgated by the Securities and Exchange Commission under § 10(b), which makes it unlawful for any person to make any false statement of a material fact or to neglect to state a material fact which is necessary in order that the statement made is not misleading